There is no easy escape from the middle-income trap

Source: This post on middle income trap is based on the article “There is no easy escape from the middle-income trap” published in “Live mint” on 26th October 2023.

UPSC Syllabus Topic: GS3 – Indian Economy

News: The article discusses the challenges of countries trying to move from middle-income to developed status. The World Bank’s chief economist says it’s harder now due to global trade and investment issues.

What defines a middle-income country?

The World Bank classifies Middle Income Countries (MICs) as those with a per capita gross national income ranging from $1,086 to $13,205 in 2022.

MICs play a significant role in various aspects, including financial stability, global trade, and the promotion of sustainable energy in response to climate change.

What is the middle-income trap?

According to the World Bank, the middle-income trap is a condition in which a middle-income country faces difficulties in moving towards becoming a high-income economy.

This challenge arises from increasing costs and decreasing competitiveness, leading to a plateau in per capita income and a lack of progress or a decline in economic competitiveness.

This leads to an inability to attain the necessary levels of investment and innovation required to advance to a high-income status.

Why is it now more challenging for countries attempting to transition from middle income to developed status?

1) Trade Environment: The current trade setting is more protectionist, affecting global business and development.

2) Decline in Investment: Foreign direct investment (FDI) is declining.

3) Global Economic Landscape: There’s a rise in public debt and a drop in private investment, hindering economic growth.

4) Governance Concerns: Countries like China have unexpected changes in leadership, raising questions about stability.

5) Educational and Bureaucratic Issues: Countries like India face challenges in improving education and bureaucratic efficiency, critical for development.

6) Global Trade Slowdown: Trade is expected to grow by less than 2% this year, compared to an average growth of more than 10% in the early 2000s.

What actions should be taken by governments of middle-income countries?

Enhance Education: Prioritize improvement, especially in school education, to produce skills that match economic needs.

Efficient Bureaucracy: Speed up and make bureaucratic and judicial decisions more predictable. This can help businesses and the economy.

Avoid Fiscal Temptations: Resist short-term fiscal populism that may seem attractive but can hinder long-term development.

Strengthen R&D: Invest in research and development to drive innovation and growth.

Good Governance: Ensure stable and transparent governance. For example, abrupt leadership changes in China raised concerns.

Resist Lobbyists: Avoid the influence of powerful lobbyists who might sway policies for personal interests, not national growth.

Focus on Trade and Investment: Given the decline in global trade and FDI, governments should create conducive environments to attract investments and boost trade.

Question for practice:

How are global trade challenges and internal governance affecting the transition of middle-income countries to a developed status?